What do people actually know about personal finance?
Not much, it seems...

Monday, April 29, 2013

The economic importance of financial literacy for students

I testified
before the Subcommittee on Children and Families of the U.S. Senate Committee
on Health, Education, Labor and Pension last Wednesday, April 24, on the
economic importance of financial literacy for students. The full text is rather
long (as I discovered at the hearing from the watch in front of me that started
to count down from 5 minutes..). I provide an abridged version below, but if
interested, the whole text is here and you can also watch the hearing: http://www.help.senate.gov/hearings/hearing/?id=fe50f807-5056-a032-526e-7bd50274b965

Ms. Chairwoman and
members of the Subcommittee on Children and Families:

Thank you for
the opportunity to speak to you about the economic importance of financial
literacy for students.

I am the
director of the Global Center for Financial Literacy at the George Washington
University. As part of my research, I develop tools for testing financial
knowledge, conduct studies into financial literacy levels, and assess what the
results of those studies mean for the United States.

I am here today
to tell you that the vast majority of Americans do not have the financial knowledge
they need to fully participate in the economy or to make informed decisions
about their own financial futures. This reality has implications for their
lives and for the economic health of the country.

According to the 2009 National Financial Capability
Study, only 30 percent of the population can do a simple 2 percent calculation
and has a basic understanding of inflation and risk diversification, concepts
that are important in financial decision-making. The second wave of that study is
about to be released. It shows no improvement in the level of financial
knowledge between 2009 and 2012.

Financial illiteracy is not only widespread, but it
is particularly severe among specific groups of the population, including
people aged 18 to 25. These youths just out of school and young adults
beginning their careers are less financially knowledgeable than the general
population.

When we focus on high school students, the findings
are even more sobering. Data collected bi-annually by the Jump$tart Coalition for
Personal Financial Literacy show that only 7 percent of high school students
can be considered financially literate. These statistics have troubling implications.
Studies show that Americans who are not financially literate are less likely to
participate in financial markets or to invest wisely. They are less likely to
save and plan for the future. At the same time, they are more likely to rely on
high-cost methods of borrowing. This is a serious problem. Remedying it is
difficult, but adding financial literacy to the curriculum in schools would be
a good start. Academic research points to four reasons why we should launch financial
literacy efforts in schools:

1)The
first reason stems from the fact that financial illiteracy is widespread. That means
young people with poor financial knowledge are unlikely to learn from their parents,
other adults, or peers. Only a small fraction of students currently have access
to adults and peers who are financially literate.

2)The second reason to
include financial literacy in school has to do with equality. A failure to
understand financial concepts is especially prevalent among certain
demographics in the population. Data from the Jump$tart Coalition and other
surveys show that white male students from college-educated families
disproportionately account for the small percentage of students who are
financially literate.This is a
distinction that persists over the life cycle. Women, African Americans,
Hispanics, and individuals with low educational opportunities continue to display
very poor levels of financial literacy—much lower than their counterparts—at
middle age, before retirement, and into retirement.

This finding is strikingly similar and robust
across countries. In a study that compares financial literacy in eight
countries—Germany,
Italy, Japan, the Netherlands, New Zealand, Russia, Sweden, and the United
States—Olivia Mitchell from the Wharton School and I found that women and those
with low levels of education display disproportionately poor financial
knowledge. This is the case at all stages of the life cycle, from youth to old
age.

3)Another
reason to focus on financial literacy in school is that it is a necessary skill
for navigating today’s complex world. This is so evident that the Organisation
for Economic Co-operation and Development (OECD) last year added financial
literacy to the topics it evaluates in its Programme for International Student
Assessment (PISA). Financial knowledge now joins mathematics, science, and
reading in those tests administered to 15-year-olds around the world.

The PISA tests gauge
whether students are prepared for future challenges, whether they can analyze,
reason and communicate effectively, and whether they have the capacity to
continue learning throughout their lives. These assessments are conducted every
three years to help us understand if students near the end of compulsory education have acquired the knowledge and skills
essential for full participation in society.
Given these objectives, financial literacy seems to be an essential addition.

4)The fourth reason why
high school is a powerful place to teach financial knowledge is a simple one:
Young people need to understand how to make wise financial decisions before—not
after—they are faced with life-changing decisions. Most notable among those
decisions is whether or not to invest in higher education. Education beyond
high school has a tremendous effect on future financial security.

At the same time, whether and how to finance
higher education has changed dramatically in recent years. The cost of a
college education has increased rapidly in the United States, surpassing the
increase in both wages and inflation. This means that young people who pursue
degrees often start their careers with substantial amounts of debt.

There
is now a great deal of material available to help teachers and schools add financial
literacy into school curricula and to improve the quality of that education.
For example, we have national standards for financial literacy from the
Jump$tart Coalition for Personal Financial Literacy and, more recently, the
Council for Economic Education. The OECD also issued guidelines for financial
education in high school, and its International Gateway for Financial Education
serves as a global clearinghouse on financial education, providing access to a
comprehensive range of information, data, resources, research, and news on
financial education issues and programs around the globe.

Other
countries, such as the United Kingdom, recently added financial literacy in
their schools.

Young
people—not only in the United States but also around the world—face a new
economic environment with more complex financial markets. They will have more individual
responsibility in investing in their own education and in planning for their
own financial security during their working lives and after retirement. And
they will be doing this, among other things, on a global scale.

If
they are going to do this well, they must be equipped with the right tools and
skills. Just as it was not possible to contribute and thrive in an
industrialized society without basic literacy—the ability to read and write—so it is not possible
to successfully navigate today’s world without being financially literate.

There
is a cornerstone of economic theory: Where you have well-informed consumers,
you will find vigorous competition and efficient markets. In other words, financial
literacy is not only good for Americans because it allows them full
participation in society, but financial literacy is also essential for
business, the economy, the country and, in this age of globalization, the
world.

Thank you for this
opportunity. I would be pleased to answer any questions.

9 comments:

Dear Annamaria,I have found your blog, which I really like it. Enjoyed to read your posts financial problems.I was wondering if you would be interested in sharing your posts and ideas on Glipho? It's a quite new social publishing platform for bloggers, where you can connect to every social network accounts.

Where could I start, if I am an early twenty something with no numeracy education and don't understand the financial times, where is the best place to begin my education? Economics for dummies type books? I would like to educate myself but would like to know how!

I am of the opinion that much can still be done (and indeed is being done) to increase financial literacy in America. The education system, internet and the community involvement can only enhance efforts. The critical need for policymakers to continue to give this issue great interest will be the long-term facilitating factor for success.

bringing financial education into schools .. it's amazing concept annmaria.. this idea will helps the students to learn financial tools and financial life cycle in a school age..i am going to share this post to every one..thanks

Think back to the first time you ever heard of Financial Planning. At one stage or another, every man woman or child will be faced with the issue of Financial Planning. While it has been acknowledged that it has an important part to play in the development of man, several of todays most brilliant minds seem incapable of recognising its increasing relevance to understanding future generations.

That's the reason I keep holding on to the notion that financial education should be given the earliest as possible. We should teach the basics of saving and so on. I think the young ones will get a grasp of it. <a href="http://www.financialplannerprogram.com>financial services firms</a>

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.